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Isle of Style

Sri Lanka's apparel industry is export-driven, and the sector is promoted by the country's export development board as one that stands for quality and ethical production. With capital Colombo ready to host the Intex South Asia 2018 sourcing fair in November, Subir Ghosh presents a country snapshot.

The global apparel trade is made up very broadly of two types of countries-the big brothers like China, India and the United States, and the much smaller ones like Bangladesh, Vietnam, Sri Lanka and others. The latter bloc constituents are similar in nature: they are sure-shot small and hardly grow any cotton worth the name; and their economies are heavily dependent on exports, and in turn on the West. Of these small countries, there is one that stands out: Sri Lanka. The tiny island nation off the southern tip of big neighbour India embodies quality and has a vibrant fashion ecosystem of its own. It is tiny for sure-as many of 17 of India's states are bigger than that island. Sri Lanka's apparel export industry is one of the most crucial drivers of the economy. The industry has grown over the past four decades and now accounts for close to half of total exports and provides a third of the manufacturing employment in the country. Earnings from apparel exports in 2017 was $ 4.8 billion. In 2014, the industry provided direct employment opportunities to over 300,000 people and indirect to 600,000. As the US Department of Commerce's International Trade Administration summarises on the export.gov portal, "Sri Lanka has built its competitive edge on value-addition rather than cheap production cost, with greater emphasis on product quality and its ability to manufacture niche products. Despite increased international competition, exporters seem to be faring quite well."

A Market Two Few

The numbers clearly indicate the lopsided nature of Sri Lanka's exports-towards the United States (US) and the European Union (EU). According to Sri Lanka's Export Development Board (EDB), the biggest market in 2017 was the US ($2,140.42 million), followed by the United Kingdom ($802.26 million) and Italy ($430.53 million). The other markets were much smaller in size even to bring up for comparison. The fortunes of Sri Lanka's apparel industry are heavily dependent, some might even insist over-dependent, on the two markets. That might make Sri Lanka a bit vulnerable; at the same time, the same set of statistics would also indicate that the prospects of expanding to other markets are phenomenal.

Most wonder: can this trend continue, can this sustain the economy?

An interesting perspective comes from Asim Younoos, global CEO of Avirate (Pvt) Ltd, a high-street international label for women from the Timex and Fergasam Group (T&FG), one of the top five apparel manufacturers in Sri Lanka and among the top ten apparel manufacturers in the world. Younoos agrees that Sri Lanka is dependent on the two markets, but believes that the trend is shifting. He says, "Exporters are working with the Indian, Australian and MiddleEast markets. Asia is the next super power and will play a key role in the growth. Also, there are some countries that we do not have any trade agreements; thus, that makes it difficult to enter (those markets).

Avirate itself is as an example. The brand was launched in June 2010 and its flagship store opened in December. A year later, it launched in India. Avirate now has five stores in Sri Lanka and seven in India.

But, this is not peculiar to Sri Lanka alone; the compulsion, as it were, is true of most apparel manufacturing countries of the region. Says Ajai V Singh, president-founder of the premier Colombo Fashion Week, "The biggest markets for apparel/fashion consumption are the US and EU. The fashion brands are housed/based there, and they operate globally from there. Since the mid-20th century, this pattern has been continuing. Even the incentives to increase trade are given these regions. If newer brands take the global stage from newer economies, then apparel manufacturing will follow too."

Singh has a point there, something that was highlighted in a 2015 paper in the JET-OUSL journal by Nishika Samarasinghe of the Lanka Institute of Fashion Technology and two others: "The apparel industry is the ideal example of a buyer-driven commodity chain marked by power asymmetries between the suppliers and global buyers of final apparel products. Global buyers determine what is to be produced, where, by whom, and at what price. In most cases, these buyers outsource manufacturing to a global network of contract manufacturers in developing countries that offer the most competitive rates. These buyers include retailers and brand owners and are typically headquartered in the leading markets in Europe, Japan, and the United States. These companies tend to perform the most valuable activities in the apparel value chain-design, branding, and marketing of products-and in most cases, they outsource the manufacturing process to a global network of suppliers."

According to Anil Wettewe, general manager at Garment Services Lanka Pvt Ltd, the Sri Lankan government and industry leaders have identified this as an area to improve, and the export development board has been sending teams to fairs. "There has been an increase in these non-traditional markets a year-on-year basis, but it could improve further. One of the issues has been the currency fluctuations in the importing countries." Examples include Turkey and Russia.

This was taken cognisance of by the EDB in August. The board remarked in an assessment, "What is very clear is that Sri Lanka has a long way to go, and if we concentrate only on our market of 21 million people, we will never be able to achieve the rapid economic development that we need. Our only choice is to integrate with the world markets, and this is one of the primary reasons for the FTAs (free trade agreements)-to enter into new

markets and bring in the investments we need along with new technology and know-how so that we can compete with the best in the world."

But, Hussain Sadique, deputy managing director at Hameedia Stores (Pvt) Ltd, has a word of caution, as he brings in the domestic aspect. He says, "It's not a good idea to focus on just two countries. It is high time that industry looks for new markets and new opportunities, including facilitating home-grown products and brands to reach global markets." Sadique's perspective is important-the Hameedia menswear brand is one of the biggest names on the home front and has been around since 1949.

Another company-not that old, but having a global footprint today is MAS Holdings. Initially an intimate apparel manufacturer that later diversified into sportswear, performance wear and swimwear, MAS Holdings was launched in 1987, around the time that Sri Lanka's apparel export industry took wings. One of MAS Holding's wholly-owned

subsidiaries is MAS Intimates. Its CEO, Suren Fernando, puts in a context, "Many of Sri Lanka's big industry players were born through joint-venture partnerships of US and European market leaders which brought in marketing, technical and management expertise to the country. This was one of the key factors for the focus on the US and EU markets.

"Today, Sri Lanka is becoming a hub for value-added apparel which is creating geographical diversity across emerging and alternative markets. The rise of unique customers, requiring bespoke sourcing models for online or hybrid business needs also blurs boundaries and companies like MAS gear up to provide full service solutions- moving from concept to distribution centre, to concept to shelf for many brands and their retail stores across the world."

The company understood the market dynamics from the onset itself, and is unsurprisingly the country's biggest apparel manufacturer. Launched by Mahesh, Sharad and Ajay Amalean, the company derived its name from the initials of the three brothers. MAS Holdings now has 53 manufacturing facilities in 17 countries and employs over 93,000 people globally. It has design and development hubs in New York, London, Hong Kong and Colombo, and customers include Victoria's Secret, Nike, Lululemon and PVH.

The global point of view is manifest: "The scope for Sri Lankan apparel is global and borderless; with the rise of e-commerce platforms the world is our virtual market. We must think seamlessly across geographies and markets where we can provide curated, high valueadded, technologically advanced design-to-delivery solutions that cater to fast fashion and digital customer platforms."

The Trade Realities

Sri Lanka, at the moment, is making up for lost ground over the suspension of the EU's Generalised Scheme of Provisions (GSP) Plus status in 2010 that was restored only in May last year. The GSP status was granted on the condition of Sri Lanka's commitment to ratify and effectively implement 27 international conventions on human rights, labour

conditions, protection of the environment and good governance. As is the case for all GSP countries, the removal of customs duties for Sri Lanka was to be accompanied by rigorous monitoring of the country's progress in implementing these conventions.

According to the EDB, the revenues lost by the country during the period was to the tune of SLR 250 billion. Much of the ground that it had gained between 2005 (when it was first awarded) and 2010 was frittered away, with the country ceding advantage to other Asian apparel exporters.

Yet, in the assessment of the post-restoration developments in August, the board was optimistic, "Apparel is by far our biggest export to the EU. Given that the Rules of Origin under GSP Plus requires fabric to be sourced from Sri Lanka or from an area that qualifies for regional cumulation in order to qualify for GSP Plus, there will be an increase in demand for fabric sourced from Sri Lankan fabric mills, rather than from countries such as China. Sri Lanka will continue to be eligible for GSP Plus as long as the periodic reviews (the first one coming in less than a year) by the EU do not raise any red flags with regard to the implementation of agreed human rights and governance reforms. Yet, once the country graduates to an 'upper-middleincome economy' status (as classified by the World Bank) and remains at that classification for three years, then Sri Lanka becomes no longer eligible for GSP Plus (with a grace period of around two years). Thus, we should have the GSP Plus benefit till 2023."

The situation becomes one of who can make the best of ground realities. According to Younoos, Sri Lankan companies can now quote competitive prices compared to other countries that have easy access to the EU. "It definitely has improved exports into the region and given (us) a bigger pie to tap into." Wettewe adds, "The outward shipment has increased with difficult market conditions in the EU. There has been a 4.69 per cent increase in shipments by July 2018 year on year."

On the other hand, Singh points out, "Losing GSP affected the industry, but a lot of big groups refocused and worked around it. The industry grew in that time too. Now that it's back, there is an interesting scenario as the industry did actually grow even while it (the status) was not there for a period. I feel now the industry can make use it or utilise it even better."

Among companies that grew even during the GSP suspension period was MAS. Fernando recaps, "The loss of GSP status in 2010 was a setback to Sri Lankan exports, affecting several export industries notably apparel, ceramics and rubber goods. The greatest impact was on apparel-Sri Lanka's biggest export to the EU. The restoration of GSP gave a much-needed boost to the export sector. Within 12 months EU exports are up by 11 per cent and apparel exports to the EU have grown by 8 per cent.

"This has strengthened Sri Lankan exports' relative competitive position in the EU. The GSP scheme would continue to catalyse increased value addition within Sri Lanka, resulting in the development of new industries, in turn creating greater employment opportunities leading to livelihood empowerment. More significant is the fact that we were also able to penetrate the EU market as a country respecting basic human rights, rule of law and good governance. This has sent a strong signal to the international investor community and will result in the attraction of foreign investments and recognition."

As per most estimates, Sri Lanka would have to act fast. The country's per capita gross domestic product (GDP), which was $3,800 in 2016, is expected to touch $4,100 this year if annual economic growth is around 5 per cent, thus elevating Sri Lanka into the upper-middle income category of countries. The EU withdraws GSP three years after a country reaches this stage. So, Sri Lanka may lose GSP around 2021, according to the Joint

Apparel Association Forum (JAAF), the apparel exporters body. The EDB, on the other hand, reckons that GSP could be withdrawn in 2024. Either way, time is short.

Last year, think-tank Institute of Policy Studies (IPS) had calculated the immediate effect of duty-free access to Europe to be a 15 per cent rise in exports to $3.8 billion-a $480 million increase. Apparel exports dominated by a few giants were expected to account for 90 per cent of the increase.

Even as Sri Lankan companies were gearing up to make the best of GSP , there were two other developments that were unfolding on the global front-the breakout of a trade war between the US and China, and Britain's decision to exit the EU. Global trade dynamics were fluid once again.

Younoos sees these developments as an opportunity for the country: "Whenever there are challenges and issues faced in the world, those also open up opportunities for other countries. At this point, Sri Lanka has a good chance of capturing a bigger share in the US market. Brexit might not really impact that much as we work with the EU and UK separately." Wettewe does not see problems either: "Sri Lankan products are more value-driven than volumedriven. The quality and service levels (on-time delivery, highly ethically compliant and proper communication) have made many buyers stick to Sri Lanka than competitors who have offered low prices. Examples are Victoria's Secret and Nike."

Singh, however, thinks these make the industry vulnerable, but hastens to add, "Having said that, Sri Lanka has a reputation of innovative high-end manufacturing, strong sustainable story (as that is the need of the hour among a global consumer base) and strong relationships with global brands."

For Fernando, trade agreements are by and large time-bound, "so, traditionally these would not form the basis of many brands' and buyers' sourcing strategies. However, the increase in bilateral and multilateral trade agreements and the progressively competitive marketplace sees even the most reputed brands looking to leverage on these." The

country's apparel industry will depend on other factors too: "Sri Lanka apparel manufacturing is ideally positioned as an ethical and sustainable destination with high

value-added capabilities. Endurance will depend increasingly on our relevance in products, how we adapt to consumer trends, and being able to offer personalised solutions, and competitive pricing for superior levels of service."

The Input Factors

Exports are only one side of the apparel manufacturing story; raw materials are another. As in the case with many small countries that are primarily apparel producers/exporters, Sri Lanka too is heavily dependent on imports of raw materials. This has a bearing on far too many factors for comfort-overall competitiveness, production costs and lead times, among others. All this makes the situation fluid.

Explanations and viewpoints, therefore, are varied. Says Younoos, "Importing fabric impacts the pricing very much, but unfortunately we do not have many local fabric manufacturers and even the ones that exist are manufacturers of basic products. The usual lead time is 30-45 days for fabric production in the Far East and the shipment takes 10-14 days to reach Sri Lanka," and goes on to add, "Sri Lanka is looking at India very closely to source fabrics to get a competitive price and faster lead time."

The state of affairs, according to Singh, affects competitiveness if the differentiator is price/ value based. "If you take your manufacturing up a few notches and focus of higher quality manufacturing which is not cheap, this opens the door for high-value orders; it's a matter of value vs. volume. Sri Lanka does not have its own fabrics; there are less textile mills compared to other manufacturing bases. Creating efficient and high-profile supply chain parks in Sri Lank would be one way to reduce lead times and reduce imports of materials (which would then be available here)."

Director of Lalan Fabrics Pvt Ltd, Dilip Parikh believes that "Sri Lanka is importing 90-95 per cent of the raw materials and that is why they are not competitive," even though companies have been manufacturing quality products for the UK and other European countries.

Nevertheless, competitiveness can improve, feels Wettewe. "This factor mainly lies in the woven fabric segment where the volatile effects can be seen. The basic knits along with the lingerie-based knits have been produced locally and always been on the increase. One factor that limits the opening of mills are the stringent requirements of the environment/pollution laws which makes it difficult to open mills. The fabric made locally is more expensive than imported fabrics and therefore the price competitiveness is not a factor. The local mills are geared for very fast lead times and major exporters have worked out strategies to sell their capacities as unique selling points. The competitiveness could improve, but with India having a sailing time of 1-4 days, I do not see this as a major issue."

For a conglomerate that straddles continents, the understanding of the dynamics from MAS Intimates is naturally expansive. Explains Fernando. "Limited supply chain capabilities compared with the Far East makes the industry less competitive on pricing and lower-priced production options. Strong backward integration is a must-have to unlock value drivers that can improve product quality, time to market, reliability and execution. The dependence on imported raw materials leads to increased production costs, unit product costs and directly affects Sri Lanka's competitiveness. Over the years, Sri Lanka has developed substantial supply chain capabilities with companies such as Teejay, Ocean Lanka and Hayleys offering creative solutions that help apparel manufacturers win in their markets."

MAS has been able to stay ahead of the curve by innovating processes and working intimately with supply chain partners to offer creative speed to market solutions to brands.

It has partnered with global experts to develop its own integrated supply chain that ensures that critical components are available locally, while increasing its capacity to drive innovation through its owned supply chain. Since 1995, commencing with Stretchline and the manufacture of elastics and narrow fabrics, MAS has developed sourcing capabilities across technology integration, raw materials and components through Silueta (three technology platforms of thermal molding, silicone flocking and injection molding), Prym Intimates Lanka (bra components), Noyon Lanka (lace), Textprint (the only printing facility in South East Asia with state-of-the-art synthetic fabric Printing technology), and Trischel (warpknit fabrics).

Continues Fernando, "MAS has also looked at strategies to mitigate the limits on the traditional-model supply chain by ventures such as Twinery, which looks at innovation and technology deployment to support our service offering. I think that in a way, the lack of supply chain capability has forced us to look at creative internal and partnered solutions to offer value to customers.

"We are constantly on the look-out for dynamic companies that we could join hands with to enhance our service offering beyond the traditional value proposition. The most recent example would be the recently formed strategic partnership with global logistics giant Hellmann Worldwide Logistics, which gives MAS a strong foundation to offer warehousing, value added services and 4th party logistics solutions. This give us the opportunity to further enhance our agility and speed to market."

This has been one of the many reasons which went on to make MAS a leader in the industry. Fernando contends, "The raw material base of the industry should be strengthened by improved relations with global fabric and accessory producers, and by encouraging more foreign investments and partnerships for local suppliers. A good example of this is the recent joint venture between MAS and Best Pacific, which allows both partners to enhance capabilities in innovation and product development."

Better Than Good

There are many reasons why Sri Lanka is a diminutive, but gutsy and formidable player-its consistent delivery on the quality front. The obvious question would be: how did this happen?

As Singh illustrates, "Sri Lanka couldn't effectively compete on pricing, which other countries in Asia did better-like Bangladesh. The infrastructure cost in Sri Lanka is comparatively high. After the quota system ended, many companies moved to their own countries. Some in Sri Lanka started focusing on high-quality manufacturing, and it became the competitive edge. It was a shift of focus, and it's still maintained. In addition, Sri Lanka has a good sustainable track record and strong stories to back it."

Wettewe brings in another point of view, nay explanation, "The level of maturity of the Sri Lankan management at top and mid-levels make an impact on the product quality and process. When products that cannot be tolerated (in quality terms) are discovered, the garments are simply not shipped out even though the profit would be less. In other words, the buyers are invariably assured of quality."

The emphasis on quality also came through during an interview with Buddhi Paranamana, general manager for innovation and strategy at Hela Clothing earlier this year. He had said at the time, "Quality is embedded in our development and production process. Our quality assurance happens at the fabric mill, where fabric technologists develop and produce the fabric in collaboration with the mill adhering to our customers' quality levels. Quality assurance checks are carried out at the GRN point for all raw materials (fabric, trims, elastics, thread and all other components), when laying the fabric, after cutting the fabric, when sewing, after sewing, and just before the goods are shipped to the customer."

A $200 million company focusing on apparel manufacturing, design and innovation, Hela Clothing has 12 factories in four countries. Providing design-to-deliver solutions in the intimatewear, sleepwear and casualwear product ranges, its two main clusters Hela Intimates and Hela Casual produce products in 12 facilities, of which nine are in Sri Lanka and three in Kenya, Ethiopia and Mexico.

As Paranamana had asserted to this magazine, "Most brands turn to Sri Lanka for innerwear due to the high standard in quality and end-to-end solutions. All leading manufacturers in Sri Lanka boast of very high standards in compliance for their factories as well as employees. This has become part of the overall country's offering. Hela Clothing, like most leaders in the industry, provides more than just manufacturing solutions for brands. An end-to-end approach for design & innovation is a key offering that differentiates us from Asian counterparts."

According to Fernando, the quality factor has an additive effect. He says, "Sri Lanka outperforms our neighbours not only in terms of quality, but also in reliable delivery and the ability to manufacture complex high value-added and technologically advanced products, such as wearable tech. The ethical and sustainable positioning also fosters trust and recognition from brands and the global apparel industry. Of course, this is driven by an educated, skilled and trainable workforce committed to high standards. At MAS, we have a decade of customised lean manufacturing integrated into our operations and front-end, where built-in quality, continuous improvement and team member level problem solving in now the norm. The lean culture has increased operational empowerment of our team members and their span of control, which has sparked grass-root level innovation in process and machines."

Sri Lanka is a prime sourcing destination for high-end brands as it is able to offer quality in terms of product engineering, high-end specialised manufacturing and agility to adapt to the continually changing customer and market requirements. "Sri Lanka's sustainability positioning is increasingly being recognised, with brands reaching out to us to co-create more sustainable products. Consumers are progressively seeking responsibly sourced fashion: focusing on the story behind the product coupled with a connectivity to the people and places their products come from," he adds. MAS incidentally is a founder member of the Sustainable Apparel Coalition (SAC).

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